Nucleus Life AG. Solvency and Financial Condition Report

Transcription

1 Nucleus Life AG Solvency and Financial Condition Report for the financial year ended 31 December 2017 Nucleus Life AG l Bangarten 10 l FL-9490 Vaduz l Liechtenstein Tel l Fax l info@nucleus.li l

2 Contents Executive Summary... 4 A. Business and performance... 6 A.1 Business and external environment... 6 A.1.1 Name and legal form of the undertaking... 6 A.1.2 Name of the responsible Supervisory Authority... 6 A.1.3 Name of the external auditors... 6 A.1.4 Holders of qualifying holdings in the undertaking... 6 A.1.6 Lines of business and geographical areas... 6 A.2 Underwriting performance... 7 A.3 Performance from investment activities... 8 A.4 Expenses... 8 B. System of governance... 9 B.1 General governance arrangements... 9 B.1.1 System of Governance... 9 B.2 Fit and proper B.3 Risk management system B.4 Own Risk and Solvency Assessment B.5 Internal control system B.6 Internal audit function B.7 Actuarial function B.8 Outsourcing C. Risk profile C.1 Underwriting risk C.2 Market risk C.3 Credit risk C.4 Liquidity risk C.5 Operational risk D. Valuation for solvency purposes D.1 Assets D.2 Technical provisions D.2.1 Key assumptions D.2.2 Technical provision calculation methodology D.3 Other liabilities E. Capital management E.1 Own funds Page 2 of 30

3 E.2 Solvency Capital Requirement and Minimum Capital Requirement Annex Quantitative Reporting templates Balance Sheet Premiums, claims and expenses by line of business Premiums, claims and expenses by country Life & Health Technical Provisions Own funds Solvency Capital Requirement Page 3 of 30

4 Executive Summary Nucleus Life AG ( the Company ) is a life insurance company domiciled in Vaduz, Liechtenstein, and regulated by the Financial Market Authority (FMA) Liechtenstein. Business and performance The Company writes mainly single premium Deposit-Linked business, targeting high net worth clients, and to a lesser extent the mass-affluent market. It focuses on Germany where it sells policies local compliant products, and international business (written according to Liechtenstein law), but also writes some business in Austria, Belgium, Sweden and Norway. Gross booked premiums in 2017 amounted to CHF (2016: CHF ), while the loss for the year came to CHF (2016: CHF ); based on these results it should be possible to achieve profitability in System of Governance The Board of the Company considers the system of governance to be adequate and proportionate to the nature, scale and complexity of the risks inherent in its business. The Company ensures that all persons, who effectively run the Company or fulfill other key functions, are fit to provide sound and prudent management through their professional qualifications, knowledge and experience, and are proper by being of good repute and integrity. The Company s system of governance has been designed around a Risk Management framework together with the controls and processes. It employs the three lines of defense governance model: 1st Line of Defence: Management and staff 2nd Line of Defence: Risk management & Compliance (Oversight) 3rd Line of Defence: Internal Audit (Assurance) It performs an Own Risk and Solvency Assessment (ORSA) at least once year, during which all risks inherent to its business are assessed and the corresponding capital needs determined. As part of the ORSA, stressed scenarios are considered as well. Its internal control system consists of four elements: Supervisory Board Compliance and Risk Management Internal Audit Controls over Outsourced Activities The governance structure of the Company has not changed materially in the year to 31 December Risk profile The Company mainly assumes Deposit-Linked business whereby the policyholder bears the financial risk. In accordance with the Prudent Person principle, the Company only invests policyholder funds in assets and instruments the risks of which it can properly identify, measure, monitor, manage and control. Shareholder assets are only invested in secure, non-volatile assets. Page 4 of 30

5 The key risks the company are exposed to are the following: Lapse risk Currency risk Short term liquidity risk Litigation risk Valuation for solvency purposes As at 31 December 2017, the assets and liabilities of Company based were as follows: Solvency II value (CHF '000) Stautory value (CHF '000) Balance Sheet Total assets 152' '332.5 Total technical provisions 146' '746.1 Other liabilities 1' '280.8 Total liabilities 147' '026.9 Excess of assets of liabilities 5' '305.6 Capital management The objective of own funds management is to maintain, at all times, sufficient own funds to cover the Solvency Capital Requirement ( SCR ) and Minimum Capital Requirement ( MCR ) with an appropriate buffer. The Company s Solvency II position as at 31 December 2017, and the comparative position as at , were as follows: Capital requirements 2017 (CHF '000) 2016 (CHF '000) Solvency Capital Requirement (SCR) 2' '319.9 SCR Ratio 234.4% 305.3% Minimal Capital Requirement (MCR) 4' '966.6 MCR Ratio 115.6% 101.6% For a short period in time in mid-2017, following a weakening of the CHF against the EUR, the Company s MCR Ratio fell to 99.6%. This could have been prevented by maintaining its capital in EUR (which is the currency in which the MCR is ultimately measured), but as the Company s capital was blocked by the FMA, it was not possible to take appropriate measures. During the 2 nd half of 2017 the Company increased its capital by CHF , thereby restoring solvency. David Swanepoel Vaduz 3 May 2018 Page 5 of 30

6 A. Business and performance A.1 Business and external environment A.1.1 Name and legal form of the undertaking Nucleus Life AG ( the Company ) is incorporated in Liechtenstein as a company limited by shares (Aktiengesellschaft). Its registered offices are at: Bangarten 10 FL-9490 Vaduz A.1.2 Name of the responsible Supervisory Authority The Financial Market Authority Liechtenstein (FMA) is responsible for the financial supervision of the Company. The FMA s address is: Financial Market Authority Liechtenstein Landstrasse 109 Postfach 279 FL-9490 Vaduz A.1.3 Name of the external auditors The Company s external auditor is KPMG (Liechtenstein) AG: Landstrasse 99 FL-9494 Schaan A.1.4 A.1.6 Holders of qualifying holdings in the undertaking The Company is de facto controlled by Nucleus (Holdings) SCA, Luxembourg, even though Plenum Holdings AG, Switzerland, legally holds a 56.72% interest of the Company (down from 65% in 2016). An application to transfer the 56.72% stake currently held by Plenum Holdings AG to Nucleus (Holdings) SCA is currently being processed, and if approved by the FMA, the stake held by Nucleus (Holdings) SCA will increase to 65.22%. There will be no other qualifying shareholders with an interest of 10% or more. Lines of business and geographical areas The Company is authorised to write the following classes of business: Class 1. Life Insurance Class 3. Unit-/Fund-linked Life Insurance It is authorised to do business in Austria, Belgium, Germany, Ireland, Italy, Norway, Sweden and Switzerland. Page 6 of 30

7 A.2 Underwriting performance The Company s main markets are International (written according to Liechtenstein law) and Germany, with modest volumes coming from Belgium and Norway. The Company s gross booked premiums per country in 2017 and the corresponding numbers for 2016 are depicted in the table below (in CHF). Gross booked premiums 2017 (CHF 2016 CHF) Liechtenstein 12' '370'090 Germany 3' '512'179 Belgium '639 Norway '209 Total 16' '114'117 Financial statements are prepared in accordance with Liechtenstein GAAP. The salient items of the profit and loss for the year ended 31 December 2017 are shown below. Year ended 31 December (CHF) 2016 (CHF) Gross premiums '114'117 Gross claims '963'999 Acquisition costs '290 Operating expenses '811 Change in provisions for Deposit-linked contracts '178'183 Result '145 Breakeven was expected in 2017, however, due to a number of unexpectedly large expense items (mainly made up of extraordinary fees related to the FMA, higher than expected audit fees, and a currency loss made when a loan was converted into equity) a small loss was made in As the bulk of these costs should not be recurring, a profit can be expected in Page 7 of 30

8 A.3 Performance from investment activities The Company writes only Deposit-Linked business, and does not provide any asset selection advice. The investments linked to insurance policies are selected by policyholders or their appointed advisers, or, where applicable, by asset managers selected by the policyholders and appointed for this purpose by the Company. Assets and policyholder liabilities are matched at all times. The following assets * are held to cover technical provisions for linked liabilities. Asset class 2017 (CHF) 2016 (CHF) Equity 98'876'513 87'167'082 Fixed income 35'975'737 23'484'263 Cash, deposits and money market 10'876'510 14'579'533 Total '230'877 * Excluding assets of policies not yet issued and policies surrendered but not yet paid out. Where assets are suspended or no market value is available, a fair value is calculated; if this is not possible, the value of the asset is written down to zero. Investment income comprises dividends, interest and other income receivable, realised gains and losses on investments and unrealised gains and losses. Movements are recognised in the profit and loss account in the period in which they arise. The Deposit-Linked insurance policies are valued by reference to their linked asset values. The performance of the policies therefore depends on the performance of the assets selected and the application of policy related charges in line with the policy contract terms and conditions. A.4 Expenses Expenses can be split into acquisition costs and operating expenses (CHF) 2016 (CHF) Acquisition costs Operating expenses Acquisition costs will continue to vary according to type and size of business written, while expense levels are expected to remain constant. Page 8 of 30

9 B. System of governance The Board of the Company considers the system of governance to be adequate and proportionate to the nature, scale and complexity of the risks inherent in its business. B.1 General governance arrangements The Company s system of governance has been designed around a Risk Management framework together with the controls and processes. B.1.1 System of Governance The Management and the Supervisory Board, collectively the AMSB (Administrative, Management or Supervisory Body), is responsible for the implementation and monitoring of the governance of the Company. The Supervisory Board is responsible for defining the Risk Appetite of the shareholders of the Company by means of a Risk Statement, while the Management is required to manage the Company in accordance with this Risk Appetite. In case of uncertainty, Management consults with the Board. Board of Directors Vincent Derudder (Chairman) Simon Colboc Key Functions The Company has established the four key independent control functions required under the Corporate Governance Requirements for Insurance Undertakings under Solvency II. These functions are responsible for providing oversight of and challenge the business, and for providing assurance to the Board in relation to the Company s control framework. The following section provides a summary of the authority, resources and operational independence of the key functions: Compliance function (Internal Controls) - led by the Head of Compliance responsible for the Company s Compliance Policy identifies, assesses, monitors and reports the compliance risk exposure tracks changes in the environment that could affect the Company s compliance risk, and monitors the appropriateness of the Company s compliance procedures inputs into the ORSA process and report The Compliance function considers and monitors the regulatory environment, financial crime, data protection, and compliance. The findings of the Compliance function are reported to the Management and the Board. Page 9 of 30

10 Risk function - headed by the Risk Officer ( RO ) oversees and monitors the effective operation of the risk management system and ORSA identifies and assesses emerging risks maintains an entity-wide view on risk exposures and the Company s risk profile ensures that material risk issues receive sufficient attention at Board level and that the Board plays an active part in setting and reviewing the overall risk-appetite and tolerance limits provides detailed reporting on risk exposures and advises on risk-management matters, including strategic affairs such as corporate strategy, mergers and acquisitions, major projects and investments The Risk Officer prepares a quarterly Risk Assessment Matrix which is presented to Board, giving it information gathered through the risk management process. The risk function maintains independence by carrying out an oversight role in the major processes, allowing for robust challenge of decisions and processes across the business. Actuarial function - performed by an external actuary approves the methodologies and assumptions used for calculating technical provisions, ensuring that they are appropriate for the line of business approves the underwriting policy and reinsurance arrangements analyses and evaluates data and results and reports to the Board contributes to the risk management system Under Liechtenstein law, an insurance company is required to have an Appointed Actuary in addition to the Actuarial function required under Solvency II. Considering the size of the Company and the nature of its business, the same actuary performs both roles. Care has been taken ensure that there is no conflict of interest, and that independent checks (4-eyes principle) are at all times ensured. Internal Audit function - performed by an external company evaluates the adequacy and effectiveness of the internal control systems and other elements of governance reviews the ORSA process & report provides an independent assessment in a report to the AMSB The Internal Auditor is an experienced auditor from an external organisation, providing the required level of independence. The findings of the Internal Auditor are reported to the AMSB. B.2 Fit and proper The Company ensures that all persons who effectively run the Company or perform key functions are fit to provide sound and prudent management through their professional qualifications, knowledge and experience, and are proper by being of good repute and integrity. The following persons are checked prior to commencement of their employment contracts: Directors Management Appointed Actuary Page 10 of 30

11 Risk Officer Compliance Function Actuarial Function Internal Auditor Information required and checks performed include the following: Interview Passport or ID CV (educational background, professional qualifications, membership) References Criminal record check Credit check Bankruptcy check Financial Sanctions & Anti-money Laundering check Recurring checks are performed on a regular basis. B.3 Risk management system Risk Management framework The Risk Management framework consists of a set of policies covering all the possible risks the Company could face, summarised in the form of a Risk Assessment Matrix and a Risk Report. The Risk Assessment Matrix is updated on a regular basis, together with controls which the Company uses to manage the specified risk. Risk Appetite Statement The Risk Appetite Statement is defined by the Board and describes the risk boundaries (and hence the risks) the Company is willing to operate within. Overall the Company is risk averse which is reflected in the way it conducts its business. Three Lines of Defence governance model The Company s Risk Management system follows the three lines of defence principle: 1 st Line of Defence: Management and staff The 1 st line of defence is responsible for the day to day management of risk and control within the business operations as well as delivering the strategy and optimising business performance within the agreed governance and risk framework. 2nd Line of Defence: Risk management & Compliance (Oversight) The 2 nd line of defence is comprised of the Risk Management function and the Compliance function. These are independent functions that provide assurance to the Board with regards to the adequacy and effectiveness of the overall risk management system. 3rd Line of Defence: Internal Audit (Assurance) The 3 rd line of defence is provided by the independent Internal Audit function which validates the controls and performs an objective review of the risk management process. This function provides assurance to the Management and the Board on assertions of the Company s risk exposure. Page 11 of 30

12 B.4 Own Risk and Solvency Assessment The main purpose of the Own Risk and Solvency Assessment ( ORSA ) is to ensure that the Company assesses all risks inherent to its business and to determine the corresponding capital needs or, alternatively, to identify other methods to mitigate specific risks. The ORSA takes a top-down approach, linking business objectives, business risks, business planning and capital planning. It is performed at least once per annum, or on an ad hoc basis if a new project or product that may impact on the capital of the Company is considered. It can also be triggered by a sudden, unexpected adverse event. As part of the ORSA, stressed scenarios are considered, as well as the capital needs and/or mitigation measures necessary under such scenarios. The aim of these stress tests is to ensure that the business is robust enough to weather adverse events without detriment to policyholders. The outcome of the ORSA is presented to the AMSB. B.5 Internal control system The purpose of the internal control system is to manage or mitigate, rather than eliminate, the risk of failure to achieve business objectives, and can only provide reasonable, and not absolute, assurance against material losses. The Company is of the opinion that the internal control system is appropriate to the nature, scale and complexity of its business. The internal control framework has four elements: Supervisory Board The Board has overall responsibility for ensuring that an adequate and effective system of internal control is maintained in the Company. Compliance and Risk Management functions These functions oversee internal controls, including drafting and implementing policies and procedures, and monitoring against compliance with them. Internal Audit function The Internal Audit function is an external appointment, providing a layer of independent assurance. Controls over Outsourced Activities The Company makes extensive use of outsourcing, and therefore pays particular attention to the monitoring of these activities and ensures that these persons or entities maintain at least the same standards as those of the Company. B.6 Internal audit function The independent (external) Internal Audit function provides an analysis and evaluation of the adequacy, effectiveness, efficiency and quality of risk management, internal control and governance systems and processes. Page 12 of 30

13 An audit plan is created on an annual basis to ensure that sufficient evidence is obtained to evaluate the effectiveness of the risk management and control processes across the business. The findings and recommendations of the Internal Auditor are discussed with Management, after which it is presented to the Board. B.7 Actuarial function The Company has outsourced the Actuarial function to an external actuary; this additional skilled (and independent) resource provides an additional layer of control and confidence. Due to the size of the Company and the nature of its business, the Actuarial function also acts as Appointed Actuary. Sufficient checks and balances have been built into the processes to ensure that the Actuarial function remains objective and free from the influence of other functions or from the Company s AMSB. The Actuarial functions drafts an annual Actuarial Report which is presented to the Board and the Regulator. B.8 Outsourcing The Company outsources a number of important functions to independent external providers. The rationale behind the decision is that outsourcing, if managed and monitored properly, not only gives the Company access to a wider and better range of skills, but can also be more cost-effective (as opposed to employing permanent staff). The following important functions are outsourced: Appointed Actuary Actuarial function Internal Audit function Bookkeeping incl. payroll The Compliance function is responsible for evaluating all new outsourcing partners, as well as monitoring them on an ongoing basis, performing at least annual checks. C. Risk profile The Company assumes mainly Deposit-Linked business whereby the policyholder bears the financial risk. In accordance with the Prudent Person principle, the Company only invests policyholder funds in assets and instruments the risks of which it can properly identify, measure, monitor, manage and control. Shareholder assets are only invested in secure, nonvolatile assets. The more significant financial risks to which the Company is exposed are set out below. Page 13 of 30

14 C.1 Underwriting risk Mortality risk The Company is exposed to the risk of mortality experience being higher than expected, leading to higher than expected death claims. As the Company writes only risk business with very low sums assured, this is a very limited risk. Suitable reinsurance arrangements are in place to reinsure the bulk of the mortality risk commensurate with the Company s risk profile and capital. Lapse risk The Company is exposed to the risk of surrenders being higher than expected, leading to a loss in fee income. The Company writes mainly single premium investment business, which typically shows a relatively low and stable lapse rate. The lapse risk is not always easy to manage, as policies are often surrendered for reasons outside of the control of the Company, for example due to poor market performance, or because the policyholder is in need of money. The risk of one or two very large policies being surrendered for whatever reason, is however a real risk that can result in a not insignificant reduction in fee income. It was, however, assumed that the standard lapse stress scenarios under Solvency II (upward and downward increase of 50%; immediate 40% mass lapse) are adequate, and that no further stress scenarios are required. C.2 Market risk Market risk describes the risk of loss or of adverse change in the financial situation resulting, directly or indirectly, from fluctuations in the level and in the volatility of market prices of assets, liabilities and financial instruments. As the Company writes mainly Deposit-Linked business where the investment risk is carried by the policyholders, the key market risk is that of a fall in the value of policyholder assets, resulting in lower fee income. Price risk A change in the market value of the Deposit-Linked funds would affect the annual management charges accruing to the Company, since these charges are based on the market value of policyholder assets. Currency risk Similarly, due to the fact that the annual management charges are deducted from contracts in contract currency, a change in foreign exchange rates relative to the Swiss Franc can result in fluctuations in fee income. Page 14 of 30

15 The currency risk is a sizeable risk, as the bulk of its fee income is derived in Euro, while almost all of its expenses are in Swiss Franc. The stress tests performed allow for a ±25% change in exchange rates, which is deemed to be adequate. Interest rate risk The only interest rate risk that the Company faces is that of the interest earned on its own capital, which is fully invested in cash. This capital already attracts a negative rate of interest, and the risk is that the Swiss National Bank may increase this interest penalty even further. C.3 Credit risk Credit risk refers to the risk of loss, or of adverse change in the financial situation resulting from fluctuations in the credit standing of issuers of securities, counterparties and any debtors to which the Company is exposed. Reinsurance counterparties This is a negligible risk as mentioned above the mortality risk is limited, while the Company s reinsurer is A-rated. Banking counterparties The defaulting of a policyholder custodian bank would not have a direct impact on the financial situation of the Company, although there could be an indirect impact if the amount of fee income from policyholder assets is reduced. The fact that policyholder assets are spread across a number of European banks mitigates this risk. The Company has the bulk of its own capital at an A-rated bank in Liechtenstein. C.4 Liquidity risk Liquidity risk refers to the risk that Company, though solvent, does not have sufficient financial resources to enable it to meet its obligations as they fall due. Short-term liquidity Short-term liquidity assessments (for periods of less than one year) are performed at least once per quarter. As the Company s capital of CHF 5 Mio is being restricted by the FMA pending a change of shareholder application, this is a potential risk. As long its book of business continues to grow, and there are no sudden expense shocks or an increase in surrenders, this risk can be managed. The Company furthermore entered into a reinsurance financing treaty during the course of 2017 which provided additional liquidity, thereby mitigating the short-term liquidity risk. Long-term liquidity Long-term liquidity is a very limited risk, as the Company follows a very prudent investment strategy, investing its capital only in high quality and liquid assets, while the increasing book of policyholder assets under management will result in improved long-term liquidity. As long as the Company grows and keeps its expenses under control, this risk will remain limited. Page 15 of 30

16 C.5 Operational risk Operational risk is the risk of a change in value due to inadequate or failed internal processes, people or systems, or from external events. People risk The Company operates with a very small team of experienced, skilled people. A person leaving or falling ill may therefore have a detrimental impact on the business, in particular over the short term. This risk has been mitigated to some extent by increasing the notice periods of some of the staff members, while a panel of external consultants who can provide assistance at short notice has been identified. Outsourcing risk The outsourcing strategy of the Company actually reduces the people risk described above, as it provides access to a wider range of skills. On the other hand, outsourcing comes with the risk of failure, non-performance, ineffective management and/or oversight of the outsourcing partner. The Compliance function attends to the management and monitoring of outsourcing partners. Administration risk As a result of the highly bespoke nature of the Company s products, not all processes can be fully automated, which, if combined with the small staff complement, poses some risk. All processes and procedures have, however, been documented in detail, which will enable an external resource to take over at short notice. Litigation risk A life insurance company focussing on investment business will always be subject to litigation risk even though the investment risk is supposed to remain with the policyholder. The most typical reasons are poor investment performance or fraudulent activities (e.g. by intermediaries or asset managers). The Company is not involved in any litigation at the moment. Regulatory risk The Company is going through a change of shareholder process, resulting in additional regulatory requirements. If the process is not successful for whatever reason, regulatory action may in theory be possible. Misselling risk Whereas misselling is not a substantial risk when dealing with High Net Worth clients, it can occur in the mass-affluent segment. Great care is therefore taken to make sure that investments are not only assessed in terms of size, but also in terms of the needs and risk profile of the policyholder. Page 16 of 30

17 Reputation risk Any legal or regulatory breach, poor customer service, or local insurer failures can give the Company a bad reputation, effecting its ability to write business or form new business relationships. Whereas the Company takes care to mitigate legal and customer service risks, external risks cannot be managed. D. Valuation for solvency purposes D.1 Assets The following table shows the Company s assets as at 31 December 2017, as well as the corresponding numbers for 2016: Intangible assets Intangible assets are made up only of sophisticated software, and do not include any goodwill such as brands, trademarks or contractual relationships. The stated value, which is well below the estimated market value, is therefore assumed to be fair. Equities Listed equities have been valued at market value, while unlisted equities have been valued at net asset value. Equities that cannot be traded at all are valued at zero. Assets held for index-linked and unit-linked contracts The valuations of these assets are mostly provided by the custodian banks where the assets are held. If a custodian bank cannot determine a market value, it would typically value the asset at zero. In rare instances the Company would value an asset based on the NAV on its balance sheet, but if that is not possible it would value it at zero. Receivables and other assets The value of these assets is based on the best estimate of the recoverable or realisable value. Cash and cash equivalents Cash and cash equivalents are valued at the amount held at the period end, translated using the year-end exchange rate where appropriate. Page 17 of 30

18 D.2 Technical provisions The technical provisions comprise the Best Estimate of the Liabilities ( BEL ) and the Risk Margin. The technical provisions as at 31 December 2017 and the corresponding values for 2016 are shown in the following table: Technical provisions 2017 (CHF '000) 2016 (CHF '000) Technical provisions life (excluding health and index-linked and unit-linked) Best estimate Risk margin Technical provisions index-linked and unit-linked 146' '893.8 Best estimate 145' '230.9 Risk margin Total technical provisions 146' '907.9 D.2.1 Key assumptions Interest rate and inflation The risk-free interest rate term structure used for discounting the projected cash flows in the technical calculation is the CHF relevant risk-free structure as provided by European Insurance and Occupational Pensions Authority ( EIOPA ). The inflation assumption used is based on the Swiss Consumer Price Index (CPI). Expenses The expense assumption is based on a no new business scenario and consists of cost of administration, claims management/handling and overhead expenses. An expense analysis is performed to allocate expenses between initial and renewal, and variable and fixed expenses. Lapse assumptions The lapse assumption is based on a lapse analysis of the actual lapse experience of the Company, considering lapses by number of policies as well as lapses weighted for policy size. Term A cap linked to the size of the in-force book is applied to the term of the projections of the future cash flows. This is to allow for the fact that while lapses will eventually decrease the book to a negligible value generating very little fee income, it will not be possible to decrease costs at the same rate. An extreme example would be an in-force book reduced by lapses to CHF 1 Mio (generating fee income of say CHF per annum), while expenses (to pay regulatory duties, audits, Solvency II Functions, etc.) remain at a level of say CHF per annum. As a result the Board agreed to initiate procedures to transfer the book to another carrier free of charge once the assets under management reach a level of CHF 120 Mio, and to have the transfer completed before the assets under management reach a level of CHF 100 Mio. The cap on the projection term will therefore vary from year to year, depending on the size of the in-force book. For purposes of the 2017 SCR a term of 6.5 years has been used. Page 18 of 30

19 D.2.2 Technical provision calculation methodology The technical provisions represent a realistic estimate of the Company s future obligations with an allowance for some deviation for plausible changes in estimation in the form of the risk margin. They are not expected to be sufficient to meet the Company s obligations in all scenarios. Best Estimate Liabilities The best estimate provision for index-linked and unit-linked contracts is equal to the value of the underlying assets. Risk Margin The Risk Margin is an addition to the Best Estimate Liabilities to ensure that the technical provisions as a whole are equivalent to the amount that the Company would be expected to require in order to take over and meet the insurance obligations. The Risk Margin is calculated as the amount of capital needed to support the Solvency Capital Requirement over the lifetime of the business at the prescribed cost of capital rate of 6% per annum (also see para D.2.1 Term). D.3 Other liabilities The table below summarises the other liabilities of the Company as at , as well as the corresponding values for 2016: Other liabilities 2017 (CHF '000) 2016 (CHF '000) Other liabilities 1' '376.6 Provisions other than technical provisions Accruals Total liabilties 1' '481.3 No adjustment is required to these valuations for the valuation for solvency purposes as the amounts held under IFRS measurement principles are deemed to be approximations of fair value. E. Capital management E.1 Own funds The objective of own funds management is to maintain, at all times, sufficient own funds to cover the Solvency Capital Requirement ( SCR ) and Minimum Capital Requirement ( MCR ) with an appropriate buffer. The Company performs an Own Risk and Solvency Assessment ( ORSA ) exercise at least annually, or when the risk profile of the Company changes. The ORSA exercise incorporates the business planning process covering a three-year time horizon. The Company s own funds as at as well as the corresponding values for 2016 are shown below: Page 19 of 30

20 Own funds 2017 (CHF '000) 2016 (CHF '000) Ordinary share capital 5' '000.0 Organisation fund (capital contributions) 3' '400.0 Reconciliation reserve -4' '370.3 Total Own funds 5' '029.7 The Company s own funds are primarily invested in cash deposits at banks. The total amount qualifies as Tier 1 unrestricted funds, and is therefore available to cover the SCR and MCR. The following table reconciles the differences (reconciliation reserve) between the equity in the financial statements and the excess of the assets over liabilities as calculated for solvency purposes: Own funds reconciliation 2017 (CHF '000) 2016 (CHF '000) Equity in financial statements 5' '765.0 less items not recognised in financial statements Equities Debtors Risk margin Total Own funds 5' '029.7 E.2 Solvency Capital Requirement and Minimum Capital Requirement The Company uses EIOPA s Solvency II Standard Formula. It does not use Company specific parameters and does not use simplified calculations in its computations. For a short period in time in mid-2017, following a weakening of the CHF against the EUR, the Company s MCR Ratio fell to 99.6%. This could have been prevented by maintaining its capital in EUR (which is the currency in which the MCR is ultimately measured), but as the Company s capital was blocked by the FMA, it was not possible to take appropriate measures. During the 2nd half of 2017 the Company increased its capital by CHF , thereby restoring solvency. The Company s SCR and MCR (as well as the corresponding ratios) as at 31 December 2017, and the numbers for 2016, are shown in the table below. The main reason for the substantial increase in the SCR is the fact that in 2016, proper allowance was not made for the mass lapse scenario. This was rectified in Capital requirements 2017 (CHF '000) 2016 (CHF '000) Solvency Capital Requirement (SCR) 2' '319.9 SCR Ratio 234.4% 305.3% Minimal Capital Requirement (MCR) 4' '966.6 MCR Ratio 115.6% 101.6% The individual components of the SCR are shown in the Annexures. Page 20 of 30

21 Annex Quantitative Reporting templates The following annual quantitative templates are attached as Annexures: Solvency II Balance Sheet Premiums, claims and expenses by line of business Premiums, claims and expenses by country Life and Health Technical Provisions Own funds Solvency Capital Requirement Page 21 of 30

22 Balance Sheet Solvency II value C0010 Assets Goodwill R0010 Deferred acquisition costs R0020 Intangible assets R ' Deferred tax assets R Pension benefit surplus R Property, plant & equipment held for own use R0060 2' Investments (other than assets held for index-linked and unit-linked contracts) R ' Property (other than for own use) R Holdings in related undertakings, including participations R Equities R ' Equities - listed R ' Equities - unlisted R Bonds R Government Bonds R Corporate Bonds R Structured notes R Collateralised securities R Collective Investments Undertakings R Derivatives R Deposits other than cash equivalents R Other investments R Assets held for index-linked and unit-linked contracts R '653' Loans and mortgages R Loans on policies R Loans and mortgages to individuals R Other loans and mortgages R Reinsurance recoverables from: R ' Non-life and health similar to non-life R Non-life excluding health R Health similar to non-life R Life and health similar to life, excluding health and index-linked and unit-linked R ' Health similar to life R Life excluding health and index-linked and unit-linked R ' Life index-linked and unit-linked R Deposits to cedants R Insurance and intermediaries receivables R ' Reinsurance receivables R Receivables (trade, not insurance) R ' Own shares (held directly) R Amounts due in respect of own fund items or initial fund called up but not yet paid in R Cash and cash equivalents R0410 5'431' Any other assets, not elsewhere shown R ' Total assets R '331' Page 22 of 30

23 Solvency II value C0010 Liabilities Technical provisions non-life R Technical provisions non-life (excluding health) R Technical provisions calculated as a whole R Best Estimate R Risk margin R Technical provisions - health (similar to non-life) R Technical provisions calculated as a whole R Best Estimate R Risk margin R Technical provisions - life (excluding index-linked and unit-linked) R ' Technical provisions - health (similar to life) R Technical provisions calculated as a whole R Best Estimate R Risk margin R Technical provisions life (excluding health and index-linked and unit-linked) R ' Technical provisions calculated as a whole R Best Estimate R ' Risk margin R Technical provisions index-linked and unit-linked R '029' Technical provisions calculated as a whole R Best Estimate R '728' Risk margin R ' Other technical provisions R0730 Contingent liabilities R Provisions other than technical provisions R ' Pension benefit obligations R Deposits from reinsurers R Deferred tax liabilities R Derivatives R Debts owed to credit institutions R Financial liabilities other than debts owed to credit institutions R Insurance & intermediaries payables R Reinsurance payables R Payables (trade, not insurance) R0840 1'140' Subordinated liabilities R Subordinated liabilities not in Basic Own Funds R Subordinated liabilities in Basic Own Funds R Any other liabilities, not elsewhere shown R ' Total liabilities R '328' Excess of assets over liabilities R1000 5'003' Page 23 of 30

24 Premiums, claims and expenses by line of business Health insurance Insurance with profit participation Line of Business for: life insurance obligations Index-linked and unit-linked insurance Other life insurance Annuities stemming from non-life insurance contracts and relating to health insurance obligations Annuities stemming from non-life insurance contracts and relating to insurance obligations other than health insurance obligations Life reinsurance obligations Health reinsurance Life reinsurance C0210 C0220 C0230 C0240 C0250 C0260 C0270 C0280 C0300 Premiums written Gross R '985' ' '987' Reinsurers' share R ' ' Net R '917' ' '919' Premiums earned Gross R '985' ' '987' Reinsurers' share R ' ' Net R '917' ' '919' Claims incurred Gross R '351' '351' Reinsurers' share R Net R '351' '351' Changes in other technical provisions Gross R '496' ' '497' Reinsurers' share R ' ' Net R '498' ' '499' Expenses incurred R '721' '721' Other expenses R Total expenses R2600 1'721' Total

25 Premiums, claims and expenses by country S S S S S S S Home country Country (by amount of gross premiums written) - life obligations Country (by amount of gross premiums written) - life obligations Country (by amount of gross premiums written) - life obligations Country (by amount of gross premiums written) - life obligations Country (by amount of gross premiums written) - life obligations Total Top 5 and home country C0220 C0230 C0230 C0230 C0230 C0230 C0280 Country R0010 SWITZERLAND GERMANY AUSTRIA BELGIUM NORWAY Premiums written Gross R '121' '956' ' ' '987' Reinsurers' share R ' ' ' ' ' Net R '108' ' '921' ' ' ' '919' Premiums earned Gross R '121' '956' ' ' '987' Reinsurers' share R ' ' ' ' ' Net R '108' ' '921' ' ' ' '919' Claims incurred Gross R1610 2'481' '136' ' ' ' '351' Reinsurers' share R Net R1700 2'481' '136' ' ' ' '351' Changes in other technical provisions Gross R '378' ' '244' ' ' ' '995' Reinsurers' share R ' Net R '378' ' '245' ' ' ' '997' Expenses incurred R ' ' ' ' ' ' '695' Other expenses R Total expenses R2600 1'695' Page 25 of 30

26 Life & Health Technical Provisions Insurance with profit participation Index-linked and unit-linked insurance Contracts without options and guarantees Contracts with options or guarantees Other life insurance Contracts without options and guarantees C0020 C0030 C0040 C0050 C0060 C0070 C0080 C0090 C0100 C0150 Technical provisions calculated as a whole R Total Recoverables from reinsurance/spv and Finite Re after the adjustment for R0020 expected losses due to counterparty default associated to TP calculated as a whole Technical provisions calculated as a sum of BE and RM Best Estimate Gross Best Estimate R '728' ' '746' Total Recoverables from reinsurance/spv and Finite Re after the adjustment for ' ' R0080 expected losses due to counterparty default Best estimate minus recoverables from reinsurance/spv and Finite Re R '728' ' '735' Risk Margin R ' ' Amount of the transitional on Technical Provisions Technical Provisions calculated as a whole R Best estimate R Risk margin R Technical provisions - total R '029' ' '047' Contracts with options or guarantees Annuities stemming from non-life insurance contracts and relating to insurance obligation other than health insurance obligations Accepted reinsurance Total (Life other than health insurance, including Unit- Linked) Page 26 of 30

27 Own funds Basic own funds before deduction for participations in other financial sector as foreseen in article 68 of Delegated Regulation Ordinary share capital (gross of own shares) R0010 5'730' '730' Share premium account related to ordinary share capital R Initial funds, members' contributions or the equivalent basic own - fund item for mutual and mutual-type undertakings R0040 3'400' '400' Subordinated mutual member accounts R Surplus funds R Preference shares R Share premium account related to preference shares R Reconciliation reserve R0130-4'126' '126' Subordinated liabilities R An amount equal to the value of net deferred tax assets R Other own fund items approved by the supervisory authority as basic own funds not specified above R Own funds from the financial statements that should not be represented by the reconciliation reserve and do not meet the Own funds from the financial statements that should not be represented by the reconciliation reserve and do not meet 0.00 R0220 the criteria to be classified as Solvency II own funds Deductions Deductions for participations in financial and credit institutions R Total basic own funds after deductions R0290 5'003' '003' Ancillary own funds Unpaid and uncalled ordinary share capital callable on demand R Unpaid and uncalled initial funds, members' contributions or the equivalent basic own fund item for mutual and R0310 mutual - type undertakings, callable on demand Unpaid and uncalled preference shares callable on demand R A legally binding commitment to subscribe and pay for subordinated liabilities on demand R Letters of credit and guarantees under Article 96(2) of the Directive 2009/138/EC R Letters of credit and guarantees other than under Article 96(2) of the Directive 2009/138/EC R Supplementary members calls under first subparagraph of Article 96(3) of the Directive 2009/138/EC R Supplementary members calls - other than under first subparagraph of Article 96(3) of the Directive 2009/138/EC R Other ancillary own funds R Total ancillary own funds R Available and eligible own funds Total available own funds to meet the SCR R0500 5'003' '003' Total available own funds to meet the MCR R0510 5'003' '003' Total eligible own funds to meet the SCR R0540 5'003' '003' Total eligible own funds to meet the MCR R0550 5'003' '003' SCR R0580 2'134' MCR R0600 4'329' Ratio of Eligible own funds to SCR R Ratio of Eligible own funds to MCR R Page 27 of 30

28 C0060 Reconciliation reserve Excess of assets over liabilities R0700 5'003' Own shares (held directly and indirectly) R Foreseeable dividends, distributions and charges R Other basic own fund items R0730 9'130' Adjustment for restricted own fund items in respect of matching adjustment portfolios and ring fenced funds R Reconciliation reserve R0760-4'126' Expected profits Expected profits included in future premiums (EPIFP) - Life business R Expected profits included in future premiums (EPIFP) - Non-life business R Total Expected profits included in future premiums (EPIFP) R Page 28 of 30